16.4 Nonmarket Valuation of Ecosystem Goods and Services
233
mon for the naIve to make sweeping statements that
one method is generically better than another, the
fact is that more well-informed practitioners are
aware that the best method depends on the situation.
To summarize, to minimize problems that have
affected using valuation to inform policy decisions,
it is necessary to consider many details prior to
making a commitment to any specific valuation
procedure. Five of these details are identified as
follows:
1. Identifying goods and services that may be affected by the proposed policy
2. Translating units of physical impacts into the
units that are relevant for human preferences and
decision making over these goods and services
3. Determining the potential scope of changes induced to these goods and services by the proposed policy
4. Identifying the relevant population for each of
the identified ecosystem values
5. Assuring that the choice of valuation method is
appropriate to the circumstances of the proposed
policy
16.4.1 Categories of Values
To address the five previous points, it can be useful to refer to a checklist of categories of values.
Not every policy situation will have values that fall
in all categories. These categories are outlined next.
Randall (1987) and Sarker and McKenney (1992),
among others, provide more detailed explanations
of the notion of such a total valuation framework
as a starting point to establish the full range of economic values affected by a given policy.
Market Values
The values of environmental goods and services
that are bought and sold in markets, such as wood,
are accounted for if these markets are wellfunctioning markets. This is because quantities produced and consumed and prices of forest products
relative to their next best alternatives are all jointly
determined. Through this process, the price per unit
for a forest product reveals what, on average, a typical consumer is willing to pay for one unit of the
product, given how much that consumer already
has consumed. Notice that the concept is "the last
unit." The value of any good depends in part on the
relative scarcity of the good, relative to other goods
and services that might be purchased with the same
financial and physical resources.
Production costs include wages paid to labor,
capital tied up in equipment and infrastructure,
variable costs of other inputs to production, the
costs of hauling logs to mills, costs of harvesting
timber and replanting forestlands, and the trees
themselves. The proportion of the market value that
is attributed to each input, calibrated in terms of
one unit of input, is the marginal product of this input. Thus the value of labor to produce paper is
termed the marginal value product of labor. In a
well-functioning economy, the marginal value
of an input is equal to the cost of the input to the
production process. Thus the wage rate for mill employees reflects the value of labor to the production process. In a well-functioning market, therefore, it is only necessary to observe the price and
quantity produced of the final end product to the
consumer to determine the value of all the inputs
to society. All inputs values are embodied in the final market price. It would be erroneous to measure
the market value of building lumber and add to this
the value of the wages paid to builders, to sawmill
workers, and to timber forest workers, and so on.
Such an approach would grossly overestimate the
value of the forest product in the market.
However, if the market is not functioning properly, it can be determined that one or more of the
potential costs of producing forest products may
not be fully incorporated into market prices for forest products. If labor were not paid a wage that fully
represented the value of its contribution to the final product, then the price of the final product
would be too low. This is not likely to happen in
the case of a mobile input like labor or capital, because these inputs would move to a different sector where they would receive a higher return. The
mechanism that allows this mobility is the marketplace and the concept that a productive input will
move to its highest-valued use. In the ideal, the
market assures that all inputs are used in their mostvalued use to society. But in natural resource sectors and many industrial sectors that use environmental inputs, the market alone may not adequately
serve to allocate all inputs and outputs in the way
that leaves society most well off. If inputs are not
valued at their highest-valued use at the margin,
then the full costs of production are not accounted
for, the price is too low, and the amount produced
for the market is too high. Thus, if water quality or
air quality is an input to the production process that
is not paid its full cost, then the produced products
will have a market price that does not embody the
true costs of these environmental inputs. The market price will be too low, and too much of the manufactured product will be produced and sold in markets' relative to a well-functioning market.
233
mon for the naIve to make sweeping statements that
one method is generically better than another, the
fact is that more well-informed practitioners are
aware that the best method depends on the situation.
To summarize, to minimize problems that have
affected using valuation to inform policy decisions,
it is necessary to consider many details prior to
making a commitment to any specific valuation
procedure. Five of these details are identified as
follows:
1. Identifying goods and services that may be affected by the proposed policy
2. Translating units of physical impacts into the
units that are relevant for human preferences and
decision making over these goods and services
3. Determining the potential scope of changes induced to these goods and services by the proposed policy
4. Identifying the relevant population for each of
the identified ecosystem values
5. Assuring that the choice of valuation method is
appropriate to the circumstances of the proposed
policy
16.4.1 Categories of Values
To address the five previous points, it can be useful to refer to a checklist of categories of values.
Not every policy situation will have values that fall
in all categories. These categories are outlined next.
Randall (1987) and Sarker and McKenney (1992),
among others, provide more detailed explanations
of the notion of such a total valuation framework
as a starting point to establish the full range of economic values affected by a given policy.
Market Values
The values of environmental goods and services
that are bought and sold in markets, such as wood,
are accounted for if these markets are wellfunctioning markets. This is because quantities produced and consumed and prices of forest products
relative to their next best alternatives are all jointly
determined. Through this process, the price per unit
for a forest product reveals what, on average, a typical consumer is willing to pay for one unit of the
product, given how much that consumer already
has consumed. Notice that the concept is "the last
unit." The value of any good depends in part on the
relative scarcity of the good, relative to other goods
and services that might be purchased with the same
financial and physical resources.
Production costs include wages paid to labor,
capital tied up in equipment and infrastructure,
variable costs of other inputs to production, the
costs of hauling logs to mills, costs of harvesting
timber and replanting forestlands, and the trees
themselves. The proportion of the market value that
is attributed to each input, calibrated in terms of
one unit of input, is the marginal product of this input. Thus the value of labor to produce paper is
termed the marginal value product of labor. In a
well-functioning economy, the marginal value
of an input is equal to the cost of the input to the
production process. Thus the wage rate for mill employees reflects the value of labor to the production process. In a well-functioning market, therefore, it is only necessary to observe the price and
quantity produced of the final end product to the
consumer to determine the value of all the inputs
to society. All inputs values are embodied in the final market price. It would be erroneous to measure
the market value of building lumber and add to this
the value of the wages paid to builders, to sawmill
workers, and to timber forest workers, and so on.
Such an approach would grossly overestimate the
value of the forest product in the market.
However, if the market is not functioning properly, it can be determined that one or more of the
potential costs of producing forest products may
not be fully incorporated into market prices for forest products. If labor were not paid a wage that fully
represented the value of its contribution to the final product, then the price of the final product
would be too low. This is not likely to happen in
the case of a mobile input like labor or capital, because these inputs would move to a different sector where they would receive a higher return. The
mechanism that allows this mobility is the marketplace and the concept that a productive input will
move to its highest-valued use. In the ideal, the
market assures that all inputs are used in their mostvalued use to society. But in natural resource sectors and many industrial sectors that use environmental inputs, the market alone may not adequately
serve to allocate all inputs and outputs in the way
that leaves society most well off. If inputs are not
valued at their highest-valued use at the margin,
then the full costs of production are not accounted
for, the price is too low, and the amount produced
for the market is too high. Thus, if water quality or
air quality is an input to the production process that
is not paid its full cost, then the produced products
will have a market price that does not embody the
true costs of these environmental inputs. The market price will be too low, and too much of the manufactured product will be produced and sold in markets' relative to a well-functioning market.